The South African current account deficit on the balance of payments narrowed to 2.3% of gross domestic product (GDP) on a seasonally adjusted annualised basis in the third quarter 2017 from 2.4% in the second quarter 2017, the South African Reserve Bank (SARB) said in its latest Quarterly Bulletin.
Economists were divided about whether there would be a narrowing or a widening second quarter due to the large foreign trade surplus, but the improvement in the trade surplus was outweighed by the widening in the services, income and current transfer deficits. The trade surplus improved to 1.5% of GDP in the third quarter from 1.4% in the second quarter and 1.3% in the first quarter, but the deficit on the other accounts was stable at 3.9% of GDP in the third and second quarters from 3.3% of GDP in the first quarter.
The SARB said the net inflow of capital on South Africa’s financial account of the balance of payments improved to R17.4 billion in the third quarter from only R3.2 billion in the second quarter. Non-resident investors continued to acquire South African debt securities in particular, driven largely by the ongoing global search for yield.
The financial account surplus widened to 1.5% of GDP in the third quarter from only 0.3% of GDP in the second quarter and 3.4% in the first quarter. The narrowing in the second quarter was in part due to the downgrade in South Africa’s credit rating to sub-investment or junk status from investment grade by two major credit rating agencies in April.
Export growth has outpaced import growth helped in part due to improved terms of trade in 2017 relative to 2016. These foreign trade dynamics are expected to persist in the coming quarters as BRICS member countries, in particular China, which is South Africa’s largest export market, and India, import coal, iron ore and maize in ever greater quantities with bulk export volumes up 5.9% y/y in the first eleven months of the year. On the domestic front, import growth is expected to remain subdued due to poor consumer and business confidence although there has been some recovery in the third quarter with the Bureau for Economic Research’s Business Confidence Index rising to 35 in the third quarter from 29 in the second quarter. This however means that almost seven out of ten respondents are not confident about current business conditions.